Saturday, November 29, 2008

This is an email that I sent to the editors of Barron's Online today, refuting the oft-cited reasons for a Big 3 bankruptcy-type restructuring:

Sir,

Re - "A Real Bailout for Auto Makers" (November 29) - I'm perplexed about where Jay Palmer and other journalists are obtaining their information about the domestic automobile producers.

A few comments on some of Mr. Palmer's assertions:

"Proponents of a filing say that the companies would get the bankruptcy courts' blessing to trim labor costs, change work rules, revise health-care and pension benefits, trim their dealer networks, shrink their North American operations quickly and do other things that could lead them back to profitability."

1. Labor costs - these were slashed in the 2007 UAW negotiations, which Wall Street analysts cheered, that assured domestic producers labor cost parity with Japanese transplants by 2010 when all post-retirement health care obligations are off-loaded to the union and a lower-paid tier of workers replaces retiring workers.

2. Health care benefits - as of 2010 the domestics will pay no retiree health care and they have already negotiated massive cuts to US active worker health care

3. Trim dealer network - this is the one aspect of a government-sponsored reorganization that would help, suspending the anti-trust laws that prevent eliminating dealers, but would require billions in cash outlays - killing Oldsmobile, just one brand - cost over $1 billion.

4. Change work rules - GM plants are now as lean or leaner than any Toyota plant in North America. The plants where the local union doesn't play ball, e.g., Pontiac East Assembly, have been closed already. GM and Ford plants consistently beat Toyota and Honda on productivity and quality. I have no idea as to what work rules Mr. Palmer has in mind, unless he wrote this column in 1992.

5. Revise pension benefits - this has been done for current US employees for the most part, but more could be done.

6. Shrink North American operations - done. If the GM and Ford shrink their manufacturing footprints any further they won't be able to produce enough cars and trucks when the car market recovers. All they can do now is improve their cost base by closing US and Canadian plants and moving production to Mexico, but I doubt that Congress would want public money used in this way.

Here's my favorite:

"Essentially, GM, Ford and Chrysler just aren't making enough cars and light trucks that U.S. customers want to buy -- and haven't for years."

Last year 3.2 million U.S. customers bought GM products. The next closest was Toyota which sold 2.2 million products. Even Ford, another seller of cars that people don't want to buy, sold almost as many cars as Toyota - 2 million. Why are these U.S. customers buying these cars that they don't want to buy? What the author must mean is that these companies don't make cars that he wants to buy, but business journalists are hardly a representative sample of the North American automobile market.

Another gem:

"On top of this, labor relations are so out of whack that GM even pays some 8,000 workers a full salary to stay at home."

In the 2007 UAW negotiations, Detroit eliminated its "Jobs Bank" in the US that created this phenomenon. These employees have almost all been permanently severed. What should they do? Sever them again?

I do agree that that GM needs to eliminate brands, but as Mr. Palmer points out, it would cost at least $9 billion and I'm not sure that this should be done now with public money.

None of this fixes the real problem that Detroit is faced with today. They have spent billions of dollars fixing all of these problems that oblivious journalists and politicians are calling for today. Today, the restructuring is pretty much complete, but the war chest is gone, financing from operations has dried up in the face of the smallest domestic automobile market since the early 1980s, and their financing arms can't raise money.

If these companies use a pseudo-bankruptcy or a cash infusion to do further "restructuring", as Mr. Palmer suggests, how pray tell will they fund ongoing operations? And how will bankruptcy, or some form thereof, help these companies sell more cars or bring back a leasing option?

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